This incredible thunderstorm I saw last weekend while dropping my kiddo off at Carleton University isn’t the only thing growing these days. This month I’m going to talk about the inflationary storm clouds on our horizon, and what it means for our retirement plans.

Like I am sure many of you, I’m finding myself inflating around the waistline as middle-age progresses. Somehow, despite my best attempts, I find myself growing in ways that are both uncomfortable and unwanted, despite eating healthy and trying to exercise and hike as much as possible.

If that sounds familiar, you have my sympathies. Now, to make matters worse, it seems to be happening to the world around us on a daily basis. Everything has gotten more expensive this year – 7.6% more expensive, according to Canada’s Consumer Price Index or CPI. Most of us probably recognize the term CPI, but haven’t really thought about the huge implications that it has to our daily living, retirement, and estate plans. CPI itself, will celebrate its 110th birthday in 2024…so inflation, so to speak, is a senior citizen.

Alas, a pile of factors beyond our control have led to price increases. Supply chain issues, due to COVID, have driven costs higher, and the invasion of Ukraine has caused a massive spike in Oil & Gas prices. Since Oil and Gas still power most commercial transportation, that means virtually every good in the world has had a price increase to compensate for radically higher shipping costs.

What is in the Consumer Price Index?

  • According to StatsCan, there are eight major components to CPI:
  • Food
  • Shelter
  • Household operations
  • Furnishings and equipment
  • Clothing and footwear
  • Transportation costs
  • Healthcare costs
  • Recreation, education and reading, alcoholic beverages, tobacco products and recreational cannabis.

I suspect the 8th basket is always “High”, no matter what, since the addition of cannabis…

What this means for your savings and investments…

For the last 20 years, inflation has been kept more or less below 2.5%, which, economists seem to think is an ideal increase in the cost of things – enough growth to allow the economy to make profit, but not so much that it causes pain to consumers. Historically, however, the average rate of CPI over its lifetime is a bit higher – 3.4%. Our rate as of this last July, 7.6%, is actually the highest inflation rate since the 1980’s, and, as you can imagine, a bit of a concern.

High inflation leads to high interest rates – and we have started to see interest rates rise quickly and dramatically in Canada, which has hammered many fixed income investments. On the bright side “High Interest” savings accounts have skyrocketed to rates of 2.25% or so, a welcome change from the 0.25% during the early part of the pandemic. That said, you are still effectively losing money in your High Interest Savings account, as inflation is still growing around 5.2% faster than you are earning interest. It’s left little places to hide for investors, as high inflation hasn’t been good for any type of investment this year.

The good news

Fortunately, even though our investments may not be doing so well, there is some good news. In Canada, both CPP and OAS programs are fully indexed for inflation. The same holds true for a number of defined-benefit pension plans that have indexing, or partial indexing, included in their formula.

If you are close to retirement, and don’t need your CPP, you might want to consider deferring it as long as possible. The combination of inflation, and CPP’s built-in increases if you defer the start, may make it worth your while – especially if you don’t already have a pension plan that adjusts for inflation.

One interesting tidbit on CPP and the impact of the Consumer Price Index – CPP will increase if CPI increases – but by law, the CPP can’t shrink in value if inflation suddenly becomes deflation. That’s a little-known but very handy tip that really starts to make deferring CPP as long as possible a very smart retirement strategy.

Other things to think about

Higher inflation, if it lasts any length of time, might have a significant impact on a bequest in your will to charity or family that are for a set amount. Keep in mind that inflation, over time, erodes the value of a fixed amount. CPI has increased 52% over the last 20 years – which means that if your will gave someone or a charity $100,000 as a flat amount 20 years ago, then today that amount would need to be $152,338 to be the same value as $100,000 was in 2002. That’s a pretty substantial increase! If your will is more than 10 years old, it’s time to dust it off and see if the amounts you gifted originally still make sense for your situation now.

On the charity side, if you’ve been giving $100 a month for many years, you might want to think about increasing that amount, as the value of the funds to the charity have been reduced dramatically by inflation as well.

Nothing lasts forever!

I’m reading a lot of doom-and-gloom news articles in the last few months on inflation. Historically, supply-shock and wars have only had a temporary impact on inflation, and things usually revert to normal in 24-36 months. On top of that, modern governmental policy has learned dramatically from some of the monetary failures of the past that led to the high inflation of the 1970’s. We are already starting to see a reduction in the rate of inflation, thanks to many countries working hard to raise rates to control the impact.

There’s no question in my mind that, like the growth around my belly, inflation can be wrangled under control. I can’t tell you when I’m going to fit back into my old pant size, but inevitably it will happen. Until then, I’m going to diet, and so are central banks around the world. It may be painful in the short term, but eventually, we’ll all get our waistlines under control…



The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.